FMPU7064 Financial Management for Purchasers: Report on Finance

This report provides a detailed financial analysis of Capita PLC and Serco Group PLC, focusing on key financial ratios such as liquidity, profitability, long-term solvency, and working capital. The analysis aims to assess the financial viability of both companies for project acceptance. The report also includes a case study on the collapse of Carillion, examining the financial risks, strategic supplier issues, ethical considerations, and lessons learned from the collapse. The analysis involves critical evaluation of financial statements, including the balance sheet and profit and loss statements for the financial years 2015, 2016 and 2017, to identify financial strengths and weaknesses. The report concludes with recommendations and insights into the financial performance of each company, with a particular focus on which company would be a better option for project bidding, based on the overall financial health, financial leverage, and the ability to generate positive cash flow from its operations. The comparative analysis of both companies and the case study of Carillion provides a comprehensive understanding of financial management principles and their practical application.

Running head: FINANCIAL MANAGEMENT FOR PURCHASER
Financial Management for Purchaser
Name of the student:
Name of the university:
Author Note:

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Executive Summary
Financial analysis of the capita PLC and the Serco group PLC is done so that valuable
comparative analysis can be performed. The critical analysis of the collapse of Carillon is
evaluated in detailed process which has been discussed in task A and task B.

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Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................4
Task A:...................................................................................................................................4
Financial Analysis of Capita PLC and Serco Group PLC.................................................4
Liquidity Ratios:.................................................................................................................4
Profitability Ratio:..............................................................................................................5
Long Term Solvency Ratio:...............................................................................................6
Working Capital Ratio:......................................................................................................8
Overall Financial Analysis:................................................................................................9
Limitations of such analysis:............................................................................................10
Task B..................................................................................................................................10
Case Study on the collapse of Carillon............................................................................10
Financial Risk...................................................................................................................10
Strategic Supplier.............................................................................................................11
Ethical issues and the things learned from such collapse................................................12
Critical analysis and recommendation of the scandal......................................................13
Conclusion................................................................................................................................16

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Introduction:
The aim of the assignment is to concentrate on the financial analysis of Capita PLC
and Serco Group PLC for performing a comparative analysis regarding the acceptance of the
project. As a director of company the comparative financial analysis is performed to
understand the financial viability of both the business (Karadag 2015). In task A, the financial
analysis of both the company is evaluated accordingly and the strength and weakness of both
the business has been evaluated accordingly with the help of some of the key financial tools.
The financial tools used for performing the analysis is the fundamental ratios which are the
liquidity, profitability, long term solvency and the working capital ratio of both the company
has been measured in the conducted study accordingly. The financial ratios played a
significant role regarding accepting the contract of the business.
In task B, the collapse of the Carillion has been discussed which happened during the
year 2018 and the significance of analyzing the financial performance of the company in
various perspective. The role played by the upper level management of the company have
been depicted which is such a major collapse took place during that year. The reason
associated with such collapse are also discussed in the conducted study. The ethics and the
payments of the company has been critically analyzed during the conducted study. The lesson
learned from the winding up of Carillion has been discussed in a detailed basis so that the
companies going through such a major crisis may take a turn by bringing major changes in
the system in order to bring long term stability in the financial position of the business.

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Discussion:
Task A:
Financial Analysis of Capita PLC and Serco Group PLC
The financial analysis of both the company is performed because analyzing the
financial situation of the company is needed before accepting any kind of projects. Hence,
before accepting any project it is needed to analyze the financial position the business. For
that purpose, ratios are needed to be calculated in order to understand whether the business of
the company is sound. Evaluating the project in various dimensions by collecting the data
from the annual reports. In this case, the financial analysis of Capita PLC and Serco Group
PLC is performed in order to understand the performance of the business of both the
company (Capita.com., 2019). The business objective of the Capita PLC deals with the
process outsourcing, this company outsource the professional services. The computed key
ratio analysis of business of both the company is analyzed in the conducted study. The
liquidity, profitability, working capital and long term solvency ratios have been evaluated for
both the company in order to understand the financial viability of the business (Allen, Gu and
Kowalewski, 2018).
Liquidity Ratios:
The liquidity ratio of the company gives information’s regarding the company’s
ability meet the liabilities or the financial obligations. Liquidity means that the time taken by
the assets of the company to get quickly converted into cash.

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Current Ratio:
As per the current ratio of both the company, it is measured that the company ability
to pay off its current liabilities with the current assets. The higher the ratio the better is the
financial performance of the company in terms of the current ratio (Strouhal 2015). The
Current ratio of Serco group PLC is much higher than the Capita PLC, which further
indicates that as per the comparison of both the company in terms of the current ratio, the
liquidity position of the business of Serco group PLC is much higher than the Capita PLC.
The current ratio is much favorable of Serco Group PLC in the year 2016 which was 1.01
more than the other two years. This indicates that the liquidity position of the Serco group
PLC is much better than the Capita PLC as the current ratio of Capita PLC is slightly low
than the Serco group PLC. In case of current ratio analysis the Serco group PLC will be a
better option (Serco.com., 2019).
Quick ratio:
The quick ratio evaluates the intensity of the liquidity position of the business. As per
the evaluation of both the companies in terms of the quick ratio of the company, the

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performance of Serco Group PLC is much higher than the Capita PLC. This ratio measures
that the Serco PLC is able to meet its short term obligations of the business much quickly.
Profitability Ratio:
The profitability ratio of the company is to understand the profitability position of the
business of the company (Appelbaum et al. 2017). While taking contract of any big projects,
it is needed to understand the profitability position of business of that particular company. It
measures that the company’s ability to generate revenue regarding the expenses incurred by
the company (Rahman, Ibrahim and Ahmad 2017).

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Return on Asset Ratio:
Return on asset ratio measures percentage of the revenue generated by a company by
utilizing the total asset of the company. In terms of comparison, Serco group PLC will be a
better choice as per the financial year 2016 and 2017 the return generated out of the asset is
positive.
Operating Profit Margin:
Operating Profit margin of the company measures the profitability position of the
company in that case. In the year 2015, the company is showing profit which is a positive
situation for Capita PLC but after that it is running at a loss. In case of the Serco Group PLC
the business performance of the company is improving gradually.
Long Term Solvency Ratio:
Solvency ratio also plays an important role in case of project evaluation, as this
particular ratio measures the strength of the business in order to meet up its long term
obligations or the liabilities of the business. It indicates the cash flow of the business in

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meeting its short and long term obligations. Higher the ratio better the flow of cash of the
company in order to meet up its obligation.
Debt to Equity ratio:
This ratio measures the financial leverage of the business of the company in terms of
debt to equity ratio. This ratio measure the company’s ability to finance its debt in the
business. It measures the financial leverage in terms of financing where greater the ratio the
company is obtaining aggressive measures for financing its debts. In case of comparison of
both the companies, the debt equity ratio of Serco group PLC is much better than the Capita
PLC because the ratio of Serco group PLC is much low than the other company. This

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indicates that the low debt equity ratio of the company is much preferable rather than the
aggressive measures (Collier 2015). Serco group PLC ability to finance its debts out of the
equity is much better than the Capita PLC.
Total Asset to debt Ratio:
This ratio is used for analyzing the financial leverage of the company in terms of
financing the liabilities of the company by utilizing the assets. From the evaluation of the
ratios of both the company it can be interpreted that Serco group PLC is much better than the
Capita PLC in the three financial year. This indicates that the financing capacity of Serco
group PLC in much better which means that the return generated by the company is higher
than the Capita PLC. This ratio is also evaluated by the investors of the company while
proposing any kind of investment decisions. The ability of the company in terms of
generating fund out of the asset of the company (Turner 2017).
Working Capital Ratio:
The working capital ratio of the company is needed to be evaluated in order to
identify the flow of cash in the business of the company. The working capital ratio denotes
that the current assets divided by the current liabilities. Positive working capital ratio of the
company indicates that the business of the company is able to generate positive flow of cash
from the operations of the business (Tayeh, Al-Jarrah and Tarhini 2015). If the operation of
the business is carried on smoothly then the working capital management of the company will
be strong in that case, which will further ensure that the company is able to pay off its
liabilities quickly. Strong working capital ratio of the company ensures that the company is
able to generate revenue out of the expenses incurred by the company.

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As per the evaluation of working capital ratio of both the company it can be
interpreted that the performance of Serco group PLC is much better than the Capita PLC. In
this case both the company is able to generate the positive flow of cash by considering the
expenses in the cash flow of the company. Serco group PLC is able to generate more positive
cash flow than the Capita PLC where in this analysis the company is performing better than
the last three financing year as per evaluation of the annual report 2015, 2016 and 2017.
Overall Financial Analysis:
Hence, from the above ratios evaluated it can be interpreted that the overall
performance in terms of all the evaluated ratio, the overall performance of Serco group PLC
in all the financial year which is the 2015, 2016 and 2017 evaluated from the annual reports

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of the company (Serco.com., 2019). The balance sheet and the profit and loss statements of
the company has also been thoroughly identified for analyzing the conduced ratios. The
financial analysis is important in that case to identify the financial strengths and the glitches
of the company and the recommendations made of improving the loopholes of the business of
the company.
The liquidity, profitability, long term solvency and the working capital ratio of the
both of the companies has been evaluated accordingly (Smith 2017). In case of biding
contract for the project, the business of the Serco group PLC will be a better option in that
case. While going for the big projects the financial performance of the company’s matters a
lot. As per analyzing the current three financial year 2015, 2016 and 2017 of both the
companies, it can be said that the business of Serco group PLC can be taken for granted in
order to start this project (Leuz and Wysocki 2016). In case of the Serco group PLC is staying
ahead to get accepted in such contract based biding project because the overall financial
performance of the company is much sounder than the other company.
The financial leverage of Serco group PLC is much better which means that the
leverage is not much aggressive of the company as per evaluation. If the risk of financing is
aggressive, then the company will be in a huge trouble to recover the debt of the company in
terms financing equity. Hence, the leverage of the company is evaluated which means that
degree of leverage plays an important role in the evaluation of the financial position of the
company (Williams and Dobelman 2017).
Limitations of such analysis:
The only limitations to such kind of analysis is that the analysis is restricted to only
three financial years which is 2015, 2016 and 2017. Hence, more the financial year
comparisons, the better is the picture of the financial analysis of the company (Feinstein